For years, the Montreal-based company was a dividend darling. From 2000 to 2010, it raised its dividend 10 times, boosting its payment tenfold over that period. The share price – despite getting hammered during the financial crisis – also delivered hefty gains.

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Since then, however, everything that could go wrong for Reitmans did.

The Canadian dollar fell, making it more expensive for the company – which buys goods abroad in U.S. dollars – to stock its stores. Competition heated up with the arrival of Target and other chains. Reitmans' Cassis banner, aimed at women from 40 to 60, was shuttered after five years of disappointing results. And, in 2012, problems with a new warehouse management system disrupted the flow of merchandise, costing millions in lost sales.

If that weren't enough, Reitmans also battled unpredictable weather, a sluggish economy and frugal consumers. The result: Sales and profits both began heading south, culminating with a 44-per-cent drop in profit for the year ended Feb. 2, which included a loss of about $1.1-million in the fourth quarter.

With the stock now trading at $8.80 – less than half of its 2010 peak of about $20 – the dividend yield has soared to 9.1 per cent, a level that should set off alarm bells for any income investor.

"Without a turnaround, we see the dividend as unsustainable at current levels over the longer term," Tal Woolley, an analyst with RBC Dominion Securities, said in a note in which he cut the shares to "sector perform" from "outperform."

The humbling of Reitmans illustrates that a history of dividend increases does not, by itself, guarantee that a stock will continue to deliver solid returns. Investors also need to pay close attention to a company's fundamentals, looking for signs of a deterioration in the business.

In retrospect, the red flags have been apparent at Reitmans for some time.

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As far back as 2008, the company's revenue started flatlining. Sales that year were about $1.06-billion, and they fluctuated by less than 1 per cent over the next few years before skidding 3.7 per cent in 2012 and 1.9 per cent in fiscal 2013. The most recent drop is worse than it looks because, for accounting reasons, the year contained an extra week of sales.

Even more telling were Reitmans' same-store sales numbers, which include only those locations that have been operating for at least one year. Reitmans' same-stores sales turned negative in 2008 and have remained under water on an annual basis ever since.

With its business shrinking, Reitmans' profit has also taken a beating. As a result, its dividend payout ratio – dividends as a percentage of profit – has exceeded 100 per cent in each of the past two fiscal years. Clearly, this can't go on forever.

One thing Reitmans has going for it is a strong balance sheet. With nearly $170-million of cash and marketable securities as of Feb. 2, it can afford to maintain the dividend for now. However, the company said it plans to review its dividend guidelines at the end of the current fiscal year.

In a bid to reverse the sales slide, the company has undertaken several strategic initiatives. These include rebranding its Reitmans, Smart Set, Addition Elle and Penningtons banners "with an increased focus on fashion and affordability"; launching e-commerce sites for the chains that don't have them yet, namely Smart Set, RW & Co. and Thyme Maternity; and developing more international distribution deals, such as the Thyme Maternity boutiques located within Babies "R" Us stores in Canada and the United States.

On the cost side, the company is reviewing its head office expenses and examining its global sourcing strategy in an effort to reduce lead times for getting products to its stores.

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Some analysts say the moves don't go far enough. Mr. Woolley said the company should consider a "more aggressive right-sizing" of its store network. "We believe a smaller, focused footprint and a stronger e-commerce offering … would improve productivity/same-store sales and shrink the cost base without losing much in sales given the network's already broad reach," he said in the note.

Turning Reitmans around won't be easy. Fashion is a difficult business at the best of times, as chains constantly struggle to stay on top of the latest trends. Now that Target is here and other U.S. competitors such as Chico's FAS are planning to enter Canada, Reitmans will have its hands full.

"There are only so many shopping trips to go around," CIBC World Markets analyst Mark Petrie said in a recent note. "Options are becoming wider, and increasing in quality … the bar is being raised, and it is inevitable that we will see the weakest of the existing retailers fall by the wayside."

It may be too early to count out Reitmans just yet. But after years of showing investors the money, it's become a show-me story.

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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